The £11bn total includes admin fees and is on the lower end of the FCA’s previously earmarked range between £9bn and £18bn.

The proposed scheme is designed to provide fair and prompt compensation in an orderly manner, avoiding the lengthy delays and uncertain outcomes of individual court or ombudsman claims. Following key rulings from the High Court and Supreme Court which provided legal clarity on the issue, the FCA has determined that a compensation scheme is the most efficient solution.

An extensive review by the regulator found that up to 14.2 million agreements – 44% of all motor finance deals since 2007 – will be considered unfair. Compensation will be targeted at customers with regulated agreements taken out between 6 April 2007 and 1 November 2024.

An agreement will qualify if it involved inadequate disclosure of one of three key features: a discretionary commission arrangement (DCA), where a broker could adjust the interest rate to increase their own commission; a high commission payment; or contractual ties that gave a lender exclusivity.

While the total cost to firms is estimated at £11 billion, including £8.2 billion in direct redress, the average compensation per agreement is expected to be around £700. The calculation for most payouts will be based on an average of the customer’s estimated financial loss and the commission paid. However, a small number of more serious cases, similar to one considered by the Supreme Court, will receive the full commission plus interest.

Lenders will be responsible for delivering the scheme and will be required to contact eligible consumers. Those who have already complained will be contacted within three months of the scheme’s launch and will be included unless they opt out. Customers who have not yet complained will be contacted within six months and invited to opt in. The FCA also plans to run a national advertising campaign to raise awareness.

Danni Hewson, head of financial analysis at AJ Bell, commented that while lenders may be relieved the final figure isn’t higher, it remains a significant payout. “This decision brings to an end a rather ugly chapter in car finance lending,” she said, adding a note of caution for consumers. “Consumers are warned that they could lose significant portions of any compensation due if they use third parties to make a claim.”

The FCA has stated that the motor finance market continues to function well and that the scheme will provide finality for firms and investors. The consultation on the proposed redress scheme is open until 18 November 2025, with final rules expected to be published by early 2026. If confirmed, consumer compensation payments would begin later in the year.